Why China Won't Give In to President Trump

The Weekend Edition is pulled from the daily Stansberry Digest.


Why China Won't Give In to President Trump

By Justin Brill


Sometimes, a "safe haven" isn't what it appears to be...

Utilities stocks have long been considered safe-haven assets during times of market turmoil. As our colleagues Ben Morris and Drew McConnell noted to their DailyWealth Trader subscribers this week, there's good reason for this...

No matter what happens with stocks, the economy, or interest rates, there's steady and reliable demand for electricity, gas, and water. So utilities companies are relatively stable.

Plus, utilities tend to pay market-beating dividends... Over the past 12 months, the $9 billion Utilities Select Sector SPDR Fund (XLU) paid shareholders 3% in dividends. For comparison, the companies in the benchmark S&P 500 Index paid an average of 2% over the past 12 months. So XLU offered shareholders 50% more income.

But you should know something if you expect utilities to help you in the next correction...

Based on history, anyone buying these stocks today is likely to be disappointed. More from Ben and Drew...

A 3% dividend may look good relative to the S&P 500. But it doesn't look as good when you compare that yield with XLU's own history.

The longer-term chart below shows XLU's share price (the black line) and its dividend yield (the blue line). As you can see, its yield is now the lowest it has been since 2008. And the last three times its yield has fallen to this level – about 3% – XLU's rallies have stopped cold. The fund dropped and its yield jumped...

Those three pullbacks may not seem too large in the context of its uptrend. But they were 17%, 13%, and 16% drops, respectively. All three were larger drops than the S&P 500 experienced around those same periods. (We should note that XLU did drop only 9% at the end of last year, when the S&P 500 dropped 20%.)

In other words, utilities stocks do sometimes serve as safe-haven assets...

But like other assets, when you buy them can be critical. And with yields as low as they are today, Ben and Drew believe this is one of the worst times to buy in the past decade...

Extremes can get more extreme, of course. Utilities offered a lower yield at the market's peak back in 2007. But they didn't protect shareholders then... XLU dropped 49% from its 2007 peak to its 2009 low. (That was only eight percentage points better than the S&P 500's 57% drop.)

We remain bullish on U.S. stocks. Yet we still recommend holding a percentage of your wealth in "chaos hedges" like precious metals, cash, and when the time is right, utilities.

But now is not one of those times. Utilities may look good at first glance. Look a little closer, though, and you'll see lightning may be about to strike... For now, we suggest you steer clear.

Meanwhile, the ongoing trade war between the U.S. and China took another turn for the worse this week...

After U.S. President Donald Trump formally "blacklisted" Chinese telecom giant Huawei, we suspected that China would likely retaliate with an aggressive move of its own.

As it turns out, this may already be underway... You see, on Monday, Chinese President Xi Jinping paid a rare but highly publicized visit to a domestic firm called JL MAG Rare-Earth Company.

Why is this noteworthy? As you may know, rare earth elements have a number of critical industrial uses. And it just so happens that 80% of U.S. rare earth imports come from China.

In other words, this visit was likely meant to send a message. As Bloomberg reported...

President Xi Jinping's visit to a rare earths facility fueled speculation that the strategic materials could be weaponized in China's tit-for-tat with the U.S. on trade... Xi was accompanied on the trip to JL MAG by Liu He, the vice premier who has led the Chinese side in the trade negotiations.

The visit "sends a warning signal to the U.S. that China may use rare earths as a retaliation measure as the trade war heats up," Yang Kunhe, analyst at Pacific Securities Co., said by phone from Beijing. That could include curbs on rare earth exports to the U.S., he said...

Restrictions on rare earth materials from China would hurt its domestic miners. But curbs could potentially help companies like JL MAG, which makes magnets containing rare earths that are used in products including electric vehicles and wind turbines.

But this isn't the only sign that China is "digging in" for a fight...

On Tuesday, Xi and Vice Premier He made another highly publicized stop. This time, they visited a memorial to the "Long March," one of communist China's most formative events.

Again, like Monday's visit, this one may have been a thinly veiled warning to the White House. Our colleague C. Scott Garliss explained the potential significance of the move to Stansberry NewsWire readers earlier this week...

Chinese media released a video clip of President Xi Jinping calling on China to take part in a "new Long March"... Xi was referring to the Long March in 1934-1935 when China's Red Army was being pursued by the Chinese Nationalist Party. The army was on the verge of being wiped out and decided to trek across treacherous terrain to avoid its adversary.

During the march, Mao Zedong stepped into a prominent leadership role and never looked back. The march was important because it allowed the army to survive, reform, and win the respect of the Chinese people. This would ultimately lead to the communist takeover of the government and China in general.

The clip shows Xi visiting a memorial that marked the starting point of the march and laying a floral arrangement there, paying tribute to the memory of those soldiers. He said, "We are now embarking on a new Long March, and we must start all over again."

Some investors think this implies China has no intention of pursuing trade talks any further, even after China's ambassador to the U.S. said yesterday that China is ready to sit down at the negotiating table.

Finally, China announced a couple of concrete moves as well...

On Wednesday, the country's finance minister said it will offer a five-year tax break to Chinese semiconductor and software companies – the companies most likely to be immediately hurt by the White House's recent measures.

And on Friday, China's vice minister for industry and information technology said the country would ramp up its support and subsidies for domestic companies that rely on "foreign technologies."

These moves also suggest China is expecting anything but a quick resolution to the turmoil.

Now, if you've been following Steve's recommendations, this news probably raises some serious questions...

Could this escalating trade war derail his bullish thesis on China? Could it halt a potential Melt Up here in the U.S.? Does Steve have it all wrong?

If you're worried, be sure to join us next week...

You see, Steve just returned from his latest weeklong trip to China with some important news... And he's going to share all the details during an emergency briefing on Thursday, May 30, at 8 p.m. Eastern time.

Steve will answer all of your top questions about the trade war and China in general. He'll explain the $2 trillion story everyone is overlooking right now. And he'll reveal a surprising prediction that some of the top finance minds in the world shared with him. Reserve your spot for this free event right here.

Regards,

Justin Brill

Editor's note: Whether you're already following Steve's advice to invest in China or you've sat on the sidelines waiting for things to smooth out, he believes you'll walk away with an entirely different outlook on the country after his emergency briefing this Thursday, May 30, at 8 p.m. Eastern time. Get more details and save your seat by clicking right here.

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